Mining companies are an investment banker’s best friend. Since the start of 2007, Rio Tinto has paid out $174m in M&A fees. But recently it has also announced billions of dollars in writedowns, raising the question of whether the advice was worth the money?

Before 2007, Rio Tinto had not made a major acquisition since 2001, and its share price more than doubled over that period. It then embarked on a wave of M&A activity, beginning with the $38bn merger with Canadian mining and aluminium firm Alcan in 2007.

The three banks advising Rio Tinto on the deal, Credit Suisse, Deutsche Bank, and CIBC World Market, were well rewarded for their advice – receiving $20.5m each, according to Thomson Reuters/Freeman Consulting data.

Unfortunately, the $38bn tie-up with Alcan has been cited as one of the most value destructive mergers in UK corporate history.

This time last year, Rio Tinto announced $8.8bn in writedowns from the acquisition. Last week, the Alcan takeover continued to weigh on Rio Tinto as it announced a further $10bn writedown from the assets. In addition, the company said it was writing down $3bn from its Mozambique coal assets acquired in 2011. There was also the board level casualty of Tom Albanese, Rio Tinto’s chief executive, who was at the heart of the group's acquisition strategy and who announced his resignation last week.

Since the beginning of 2008, Rio Tinto’s share price has fallen by a third and, according to data from Liberum Capital, its writedowns are now equivalent to 58% of its underlying earnings since 2007.

But the advisers escaped the blame, and not everyone is impressed. A spokesman from UK proxy adviser Pirc told Financial News: "There is no evidence that there is ever any comeback to the investment banks advising on such disastrous transactions.

“The incentive in the system is to repeat them, not as in the case of air accidents, to isolate all people responsible to find out quite what went wrong. Investment bankers are present at the scene of every corporate acquisition disaster and tend to linger around afterwards”

Related

Banks often get paid a retainer fee when working on a deal, but the millions only come after the completion of a successful takeover or merger. The banks get paid for a wide range of services, from the preparation of documentation to encouraging shareholders that the deal is a good idea. Perhaps most importantly, M&A advisers are expected to correctly value the target’s assets, and know the right time to walk away from a deal.

Credit Suisse and Deutsche Bank declined to comment. CIBC World Markets did not respond to requests for comment. Rio Tinto did not return calls for comment.

Of course, hindsight is a wonderful thing. In 2007, the mining sector was in the midst of a boom, fuelled by China’s seemingly insatiable demand for raw materials. It is hardly surprising that bankers were keen to get paid for a piece of flagship M&A. Certainly when rivals were queueing to take their place.

One UK asset manager, who held a stake in Rio Tinto in 2007, said it wasn't the fault of the bankers on the deal, but rather the shareholders: “It would be wrong to say bad advice was responsible for Albanese losing his job. Given the size of the acquisition, it’s not surprising the fees were high.

"If we are unhappy with company shareholders pursuing M&A activity, then it is down to us to tell them, to vote against deals or to vote against re-election of management who did the deals. It is the job of management to negotiate those fees and to tell the banks whether they are giving good or bad advice.”

At the time, some UK asset managers had little faith in the deal. David Lis, head of equities at Aviva Investors, said that he did not have an active position at the time because there was little capital discipline in the mining sector. He said: “The record of value creation in M&A is poor across the sector.”

Mining companies are cumbersome businesses, and mergers within the sector take a long time to prove their worth.

Lis said that perhaps investment banks should be held to the same long-term assessment that mining executives are now falling foul of.

He said: “The one thing that does come out of the deal is the more tie-in to the end result there is, the better it will be for shareholders. That applies particularly to company directors but if there was some way in tying the investment banking rewards in terms of M&A fees and bonus clawbacks, perhaps that would work, but it would be a hard one to police.”